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Press Release

Issue Analysis 45 - By Mandating Health Benefits, Congress Will Make Even More Americans Lose Their Health Insurance

In 1996, Congress and President Clinton enacted legislation that requires health insurance companies to provide -- and requires consumers to buy -- certain health benefits. These mandated benefits were hailed as a "consensus" approach to health care reform. Today, a number of additional health benefit mandates are being proposed. This paper discusses how mandated benefits do more harm than good.

At the state and federal levels, mandated health benefits have been offered as a moderate, piecemeal approach to correcting problems in our health care system. Mandated benefits require health insurance companies to provide, and force consumers to buy, particular types of coverage. These can be coverage for certain treatments (such as mammography screening), for certain providers (such as acupuncturists or dentists), or for certain individuals (such as dependents). At first glance, health benefit mandates are very attractive, because they require insurance companies to expand health coverage.

Mandated health benefits are not a free lunch. They do not give something for nothing. They do, however, take away from consumers the option of not buying the mandated coverage. Consumers are forced to buy the mandated coverage -- whether they need it or not -- and therefore must often go without other coverage they need more. Thus, mandated benefits increase the cost of insurance, making it too expensive for some.

There are serious problems in our health care system. Federal health insurance mandates will only make these problems worse. Each new mandate will bring America another step toward a government-controlled, rationed system, where political concerns and bureaucratic judgements determine who deserves what treatments. If politicians want to bring down health care costs and expand access to health insurance, they should consider reforms that give consumers greater control over their health care spending. Reducing choices for consumers is not the answer.

Mandated Benefits and Consumer Choice

Proponents of mandated benefits argue that unless insurance companies and managed care providers are required to expand coverage for certain medical expenses, patients will suffer. Certainly, no one wants patients to have less coverage than they need. However, mandates do not give patients the coverage they demand. Instead, mandated benefits impose the preferences of politicians and interest groups on consumers.

Mandates often come about as the result of intense political lobbying by groups who want insurance companies to expand coverage for a particular type of health care. These interest groups are well-meaning, and all lobby for care that would benefit some consumers. However, not all consumers need the type of care mandated. In reality, mandates force consumers to pay for coverage that lobbyists and politicians want them to have, but that they may not want or need.

As a result, mandated benefits tie the hands of consumers and unions by preventing them from buying other coverage that better suits their needs. A union that goes on strike for more benefits would see some or all of the negotiated benefit increase soaked up by the cost of a mandated health benefit. By mandating benefits, Congress, rather than management or labor, decides what benefits employees will receive.

While additional health insurance may be desirable, the decision to buy it should be made by consumers, either on an individual basis or by their representatives through collective bargaining. Consumers know their own needs better than lobbyists, lawmakers or bureaucrats. Forcing mandated benefits on unions and consumers restricts consumer choice and violates the collective bargaining process.

The Explosion in Mandated Health Benefits

To date, the federal government has enacted only a handful of mandated health benefits. The mandated benefits enacted by the 104th Congress include mental health parity, minimum maternity stays, guaranteed issue, and portability.1

In contrast to the federal government, state governments have a wealth of experience in seeking out and implementing new health benefit mandates. The same year the 104th Congress mandated minimum coverage for maternity stays, 25 states took action on the same issue, bringing to 30 the number of states that have mandated this benefit.

Similarly, by the time Congress mandated parity for mental health coverage, six states had already enacted mental health parity legislation, 32 states had already mandated mental health coverage, 15 states already mandated coverage for psychiatric nurse care, 13 states had mandated coverage for professional counselors' services, and 41 states had mandated coverage for psychologist visits.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA; also known as the Kennedy-Kassebaum Act, now Public Law 104-191) requires insurers to guarantee renewal of all group health insurance plans. At the time of passage, 43 states had already enacted legislation mandating guaranteed renewal of coverage. The act also requires small group insurers to guarantee issue of all health plans. Thirty-seven states had already mandated guaranteed issue of some or all small group plans. In the individual market, 14 states had already mandated guaranteed issue.

In fact, the last twenty years have seen an explosion in the number of health benefits mandated by state governments. All fifty states and the District of Columbia impose some health coverage mandates on consumers. In 1967, only 18 mandated benefits laws had been enacted at the state level. By 1997, state level mandates numbered 863.2

When government requires consumers to buy additional benefits, consumers are the ones who must pay the additional cost of those benefits. With each additional mandated benefit, the cost of health insurance goes up. As a study conducted by the Wisconsin Office of the Commissioner of Insurance attests:

Almost any benefit added to a health insurance policy increases the cost of that policy. Only those benefits that clearly serve as substitutes for more costly services or treatment actually would decrease costs.3

Some mandates are more costly than others. The most expensive mandates are typically those that force consumers to buy coverage for care related to alcoholism, drug abuse, and mental illness. Very few mandated benefits ever reduce the cost of health insurance, largely because cost-cutting benefits do not need to be mandated. Insurance companies face financial incentives to include such coverage in their health plans, for they reduce the price of insurance and make their plans more attractive to consumers.

Increased costs lead to another negative effect of mandated benefits: greater numbers of uninsured. Businesses who can barely afford to provide health insurance and consumers at the margins (consumers who are young and healthy or less affluent) find it more difficult or less worthwhile to buy health insurance when prices increase. Consumers in the individual market are already hit with a hefty tax penalty for purchasing health insurance themselves, instead of through an employer. This market, which serves a large number of farmers and construction workers,4 will be further crippled by the cost of mandated benefits. As a result, they will drop out of the market, and increase the number of Americans without health insurance.

Mandated benefits and claims costs. One measure of the cost of a mandated benefit is the cost of claims covered under that benefit. Numerous studies have concluded that depending on the number and nature of mandated benefits, they represent a large percentage of claims made against a health plan (see Table 1). As a result, a large portion of health insurance premiums is attributable to mandated benefits. In Maryland, which imposes more mandates on consumers than any other state, claims due to mandated benefits account for one-fifth of the cost of all claims. States with fewer mandates see a smaller portion of claims costs go toward mandated benefits.

Table 1

State
Year of study
Number of mandated benefits at time of study
Percent of total claims due to mandated benefits
Number of mandated benefits as of 19975

Maryland6
1985
26
21%
36

Massachusetts7
1988
16
18.5%
25

Virginia8
1993
17
12.2%
23

Oregon9
1989
16
8.1%
17

Wisconsin10
1989
5
7.1%
17

These data measure the cost to consumers of a number of already mandated benefits. The usefulness of this measure is limited, however, for it includes claims made by consumers who would purchase mandated benefits even in the absence of a mandate. These data do not measure the unwanted costs that mandates impose on consumers. A more precise measure of a mandated benefit's cost is the additional cost it places on consumers who do not purchase the benefit already.

The most common way to measure this additional (or marginal) cost is by examining the price of health insurance premiums. Although insurance companies may also meet the added cost of mandated benefits by increasing patients' deductibles and copayments or by dropping other types of coverage, premium levels are usually the most quantifiable of these measures. However, it must be noted that premium increases can only account for a portion of the full cost of mandated benefits.

Mandated benefits increase premiums. Studies have shown that mandated benefits cause insurance premiums to rise. A 1987 study surveyed group health insurance plan administrators in six states (Arkansas, Connecticut, Maryland, Massachusetts, Oregon, and Wisconsin) to assess the impact that state-mandated substance abuse, alcoholism and mental health benefits had on health insurance premiums. Of those surveyed, 64 percent reported premium increases resulting from the three mandated benefits. Fifty percent reported increases of five to 10 percent. Three percent of those surveyed reported increases of 10 to 15 percent.11

In 1985, the Health Insurance Association of America (HIAA), which represents the health insurance industry, published the results of an actuarial study examining the effect of mandated benefits on health insurance premiums in Maryland. The study estimated that Maryland's then-26 mandated benefits increased the price of individual coverage by 12 percent, and increased the price of family coverage by 17 percent.12

A 1989 study measured the additional cost that particular mandated benefits would impose on consumers who did not already purchase them. The study found that many commonly mandated benefits increase the price of health insurance, as measured by family premiums. Dental coverage proved most expensive of those benefits studied, increasing family premiums by 15 percent. Also expensive were coverage for psychiatric hospital care (which raised premiums 12.8 percent), psychologist visits (11.8 percent), substance abuse treatment (8.8 percent), and second opinions for surgical procedures (6.8 percent).13

That mandated benefits increase the cost of health insurance is generally non-controversial. What is less well-understood is the effect these increased costs have on consumers at the margins: those consumers who are barely able to afford health insurance even before government forces them to buy additional coverage.

Mandated Benefits and the Uninsured

Although the stated goal of health insurance mandates is to expand access to health care, in reality, mandates have the opposite effect. By increasing the cost of health insurance, mandated benefits make health insurance less affordable for consumers at the margins, and therefore cause a greater number of consumers to go uninsured.

Facing higher premiums, many consumers -- particularly the young and healthy -- will find they can no longer afford health insurance. Young and healthy consumers generally pay more in premiums than they receive in benefits, and thereby decrease the cost of insurance for everyone else. As these consumers find they are paying more for insurance they are not likely to use, they will drop out of the market. Journalist Michael Kinsley explains the ripple effect this has on other consumers in the insurance market:

As the price goes up, some healthy people will drop their insurance, raising average costs in the remaining pool even further, leading more people to drop out, and so on. More people than now, not fewer, could end up uninsured.14

Also at the margins are consumers who need health coverage, but are very sensitive to any price increase. While they are able to afford limited coverage, they will not be able to afford any coverage once required to buy additional benefits. They, too, will drop out of the market. Though intended to expand coverage, mandated benefits actually have the opposite effect, leaving many consumers worse off than if the government had done nothing.

Mandated benefits may cause millions to lose coverage. An econometric study conducted by the National Center for Policy Analysis (NCPA) in 1988 estimated that 14 percent to 25.2 percent of the uninsured population are unable to buy insurance as a direct result of the cost of state-mandated benefits. In 1988, 37 million Americans lacked health insurance. According to NCPA, 5.2 million to 9.3 million of these consumers could not afford insurance due to the added cost of state-mandated benefits.15 According to the Employee Benefits Research Institute (EBRI), the number of uninsured Americans has grown to 40.3 million since then.16 Applying NCPA estimates to current data reveals that 5.6 million to 10.2 million Americans are priced out of the health insurance market by the cost of mandated benefits.17

NCPA also estimated that each state-mandated health benefit increases the number of uninsured in that state by anywhere from .167 percent to .301 percent.18 While this effect may seem minuscule, its impact is dramatic when applied to the vast number of Americans without insurance.

According to EBRI, 6.5 million Californians currently lack health insurance.19 Requiring Californians to purchase an additional mandated benefit could cause between 11,000 and 20,000 consumers to lose their health insurance. EBRI also estimates that 2.7 million New Yorkers are uninsured. An additional mandate could cause 4,500 to 8,000 more New Yorkers to join their ranks. If applied to the nation as a whole, each additional mandated benefit could add 67,000 to 120,000 Americans to the 40.3 million who currently lack insurance.

Mandated benefits cause fewer employers to offer health insurance. Because health insurance is most often purchased through an employer, another indicator of the cost of mandated benefits is their effect on a firm's decision to offer health insurance to its employees. One study of small businesses reports that "[e]ach new mandate enacted between 1982 and 1985 lowered the likelihood that a small firm would offer coverage by 1.5 percent." The same study also found that 16 percent of small firms that do not offer coverage would do so in a mandate-free environment.20 This study was conducted with data from 1985, when only 410 state-level mandated benefits had been enacted.

A subsequent study (conducted in 1992) reexamined the behavior of small firms in 1985, and found an even more pronounced effect. The study estimated that state-mandated benefits prevented one in five firms that did not offer insurance from doing so. The same study estimated that by 1988, when state-mandated benefits numbered 524, these mandates may have prevented as many as two in five firms that did not offer coverage from doing so.21 In other words, the cost of mandated benefits prevents one in five firms from offering health insurance to its employees.

There is much disagreement among academics regarding the effects of mandated benefits.22 However, this disagreement is not over whether or not some consumers will lose their insurance. Rather, the debate concerns the number of consumers that will lose their insurance as a result of being priced out of the market. Whatever estimates economists make about the size of the margin, they agree that mandated benefits will make insurance unaffordable for some consumers.

The cost of mandates will not be confined to those at the margins, however, nor to the health insurance market. Employers who continue to provide health insurance for their employees after a mandate is enacted will see their costs rise. To meet these added costs, employers will raise prices, eliminate jobs, or cut their workers' pay.

Federal mandates will be more costly than state-mandated benefits. While these data help us to understand the cost of mandated benefits (both in terms of price increases and the number of consumers who lose their insurance), they focus on the effects of state-level mandates, and therefore may not adequately depict the cost of federally mandated benefits. The landscape of the health insurance market suggests that benefits mandated by the federal government may be far more costly than those mandated by the states.

Whereas federal health insurance mandates affect all consumers in the health insurance market, state-mandated benefits do not. Under the 1974 Employee Retirement and Income Security Act (ERISA), businesses who provide health coverage for their employees through a company-financed plan may escape state insurance regulations, including mandates. These health plans (called large group plans) have become attractive to businesses precisely because they allow firms to avoid the cost of state-mandated benefits.23 However, the federal government may impose mandated benefits on these plans, as it did with HIPAA. Federal employees and Medicare recipients are also exempted from compliance with state-mandated benefits by federal law. States will often exempt Medicaid recipients and state employees as well.

State-mandated benefits only operate within the state and generally affect only a small number of consumers in the health insurance market: those who buy health insurance themselves in the individual market or whose firms purchase health insurance for them (the small group market). Not only will benefits mandated at the federal level apply to all fifty states, but they will apply to the large group market as well -- a market three times the size of the individual and small group markets combined.24

Federally mandated benefits will be more sweeping than state-mandated benefits, both in terms of the number of consumers affected and their cost. Although some populations may be exempted from benefits mandated by the federal government, they are likely to affect several times the number of consumers affected by state-mandated benefits. Consequently, their costs are likely to be significantly higher.

Political Implications of Mandated Benefits

Mandates are stealth taxes. Instead of taxing and spending directly, mandated benefits allow government to spend consumers' dollars without having to justify the cost. While consumers pay the cost of the mandate, it is never identified as a cost imposed by government, for it becomes part of the price of the goods and services purchased. Even if they are not aware of the new mandate, consumers will see their health insurance bills go up. Yet because government financed its activity through a mandate, rather than a direct tax, consumers never see who is responsible for the price increase. Mandated benefits take away consumers' money just as taxes do, while concealing the government's role.

In many ways, health insurance mandates are akin to "pork-barrel" spending. Both devices give lawmakers a tool to grant favors to interest groups while concealing the cost of these favors to the public. As a result, mandated health benefits are quickly becoming the pork of the 1990's.

Mandated benefits mean more bureaucracy. Although mandated benefits allow government to tax and spend the people's money in a way that does not appear in the federal budget, they also lead to additional "on-budget" spending. To monitor compliance with health benefit mandates, the federal government must fund a regulatory bureaucracy to regulate health insurance. Like all other regulatory bureaucracies, this agency will receive an ever-increasing budget each year. It will then use that budget to ask Congress to expand its own power over consumers, leading to more government mandates.

Mandates beget mandates. The number of mandated benefits will also increase as more health care providers see mandates as an effective way to stimulate demand for their services. The history of mandates at the state level illustrates this effect. Similarly, with HIPAA, the 104th Congress enacted guaranteed issue and guaranteed renewability mandates. Congress quickly followed its own act by enacting mental health parity and minimum maternity stay mandates as riders on the fiscal year 1997 VA-HUD appropriations bill. Because the costs are hidden, lawmakers find it easy to heap one mandate after another on consumers.

Want a health care crisis? Pass more mandates. As the number of mandates increases, so will the harmful effects of mandates. As the cost of coverage continues to rise, more and more consumers will lose their insurance. With fewer consumers able to purchase insurance, advocates of various types of care will find it increasingly difficult to persuade health insurance providers to cover their services. They in turn will form interest groups to pressure Congress to pass more mandates. With a new federal bureaucracy both enforcing and keeping an eye out for potential new mandates, these groups will find it increasingly less difficult to force their choices on consumers.

Because mandates conceal government's role, the harm caused by mandates likely will be blamed on other parties: managed care organizations, traditional health insurance companies, hospitals, doctors. The cost of health insurance will rise (as will the prices of other goods and services). Some consumers will lose their health insurance entirely, others will lose their jobs, and blame will be spread around to everyone but the responsible party: government. Congress will pave the way for this sort of disaster tomorrow by enacting health insurance mandates today.

What Congress Can Do to Expand Coverage

There are serious problems in the health insurance market. Costs have risen too quickly, insurance is unaffordable for too many, and many consumers do not have the clout they need to get the quality service they demand from health insurance providers. If consumers are unable to buy the right amount of coverage (as many are), the federal government should consider reforms that make it easier for consumers to afford insurance, such as lowering the tax burden, eliminating the tax penalty on the purchase of individual health coverage, and expanding medical savings accounts (MSAs).

Cut taxes. One of the principal reasons so many consumers cannot afford health insurance is that government takes too much money from them in taxes. In fact, the Tax Foundation reports that the average American family pays more in taxes than it spends on food, clothes, and housing combined.25 Those least able to afford insurance -- the working poor -- are hit hardest by regressive payroll and excise taxes. Lowering the tax burden will enable millions of currently uninsured Americans to buy health coverage for themselves and their families.

Repeal existing mandates. The 105th Congress should correct the mistakes of the previous Congress. The mandates passed in the 104th Congress will restrict consumer choice, cause countless consumers to lose benefits and require a massive federal bureaucracy to implement. Congress should act now to repeal these mandates before the full impact of these laws is felt.

State mandates also drive up the price of insurance, and must be curtailed. The ERISA exemption from state-mandated benefits allows many companies to offer affordable health benefits tailored to what their employees demand. Expanding the ERISA exemption would give more companies the flexibility they need to offer their employees affordable health insurance. However, the problem remains that state legislators are too eager to make consumers' health care decisions for them. Moreover, federal legislators may take ERISA expansion as an invitation to push more mandates at the federal level.

Expand MSAs. With medical savings accounts (MSAs), consumers (or their employers) contribute to an MSA every month, and pay a small monthly premium for a high-deductible health insurance policy. The money in the MSA may be spent on whatever medical expenses the consumer deems necessary. At the end of the year, he may either keep the balance of his MSA where it is or withdraw it to put it to other uses. If a consumer's medical expenses exceed the deductible, the additional costs of treatment are paid entirely by the insurance policy.

MSAs put consumers in charge of their health care decisions -- rather than government or health insurance bureaucrats -- and encourage health care savings. However, MSA contributions are not tax deductible, as most health insurance premiums are under federal law. The HIPAA allows a limited number of consumers (750,000) to deduct contributions to their MSAs from their federal income taxes. However, the IRS hits participants with a hefty tax penalty if they withdraw the unused balance in their MSAs at the end of the year. Thus, there is no real incentive to make smart health care decisions. Excessive regulatory requirements also diminish the effectiveness of MSAs.

Congress should eliminate both the cap on participants in the MSA pilot program and the penalty on health care savings. Expanding MSAs will allow consumers to choose their own doctors, give consumers greater control over their health care decisions and encourage health care savings.

Conclusion

Mandated health benefits have become very attractive to lawmakers, for they seem to require insurers to provide added insurance, without imposing any costs on consumers. Yet mandates do not give something for nothing. The true impact of a mandated benefit is to deny consumers the option of buying a particular type of coverage. As the 1991 Economic Report of the President explains:

That means that it is illegal for an insurance company to offer a bare-bones, low-cost insurance policy to consumers who only want to insure against catastrophic accidents or illnesses.26

Consumers cannot buy what is illegal for an insurance company to sell. As a result, the government denies many consumers their only option for health coverage. Mandated benefits force consumers to choose between comprehensive coverage and no coverage. For many consumers, that is no choice at all.

The last thing consumers need is to have more of their health care decisions made for them by government. Congress should look for solutions that enhance consumer choice, rather than hand those choices over to politicians.

1. The mental health parity provisions passed by Congress require consumers who buy mental health coverage to buy the same level of annual or lifetime coverage as they do for physical health benefits. The minimum maternity stay provisions require consumers to buy essentially unlimited coverage for maternity stays. The Health Insurance Portability and Accountability Act of 1996 (HIPAA; also known as the Kennedy-Kassebaum Act, now Public Law 104-191) guarantees portability by mandating that insurers in the individual market issue policies to persons who have lost their employer-based coverage, and are not eligible for any other group coverage. The act also forces insurers to issue and renew policies in other sectors of the market. For a discussion of the dangers of guaranteed issue and renewability mandates, see John S. Tottie, "Dangerous Medicine: The Kennedy-Kassebaum Health Insurance Bill," Issue Analysis, Citizens for a Sound Economy, No. 21, February 8, 1996.

10. Gregory Krohm and Mary Grossman, "Study of Costs of Mandated Benefits: Report on Phase II," Insurance Issues Paper, Office of the Commissioner of Insurance, State of Wisconsin, April 1990, p. 6. Only five of Wyoming's fourteen mandated benefits in effect at the time of the study were examined.

15. John C. Goodman and Gerald L. Musgrave, Freedom of Choice in Health Insurance, National Center for Policy Analysis, Policy Report No. 134, November 1988. The 37 million uninsured comes from Goodman and Musgrave data, which conflicts with the Employee Benefits Research Institute (EBRI) estimate of 32.4 million uninsured in 1988.

16. Employee Benefits Research Institute, Sources of Health Insurance and Characteristics of the Uninsured: Analysis of March 1996 Current Population Survey, EBRI Issue Brief No. 179, November 1996, p. 13.

17. The current estimate does not account for additional mandates enacted since NCPA's initial calculation. At the time of the study, state mandated benefits numbered only 524. Since then, states have mandated an additional 339 benefits (Laudicina et al.).

18. Goodman and Musgrave, p. A-9.

19. Employee Benefits Research Institute, p. 13.

20. Gabel and Jensen (1989), pp. 426-428. These data may understate the cost of mandates, as they are based on survey data gathered from member firms of the National Federation of Independent Businesses (NFIB), whose members "tend to be somewhat larger (average size about 8 employees) and more financially established than small businesses in general." The average small business, which is smaller and less financially secure than most NFIB members, is less likely to offer health insurance to its employees.

23. In fact, many firms self-insure their health plans to avoid the cost of state mandated benefits. Gabel and Jensen (1989, p. 430) found that approximately half of firms that switch from purchased insurance to self-insurance do so to avoid the high cost of mandates.

24. The large group market serves 45 percent of the population, followed by Medicare and Medicaid (about 25 percent), the small group market (9 percent), and the individual market (6 percent). The remainder are uninsured. John Merline, "Insurance 'Reform' Can Backfire," Consumer Research Magazine, 79:5 (May 1996), p. 10.